When Tom Larsen had a heart attack, he wasn't worried about disability coverage. He had always participated in his employer's disability insurance plan. After recovering, he returned to work. The next year, he began working for a new company where he also participated in the disability insurance plan.

Two years later, a second, more severe heart attack forced him to go out on long-term disability leave. Tom was stunned when the insurer denied his claim, citing a pre-existing condition.

Disability plans are like Swiss cheese – they appear substantial but, actually, they're full of holes. Even if Tom hadn't changed jobs, his previous employer's insurer could have found other reasons to deny or cancel his benefits.

Everyone needs to know how this happens because one in three people will experience a disabling impairment for at least 90 days prior to age 65. Of those with disabilities that last at least 90 days, the average disability will last for an additional 5.5 years (Life Association News, March, 1994).

The one in three could be you. A disability may be temporary, caused by a sports mishap or home-repair injury, or permanent due to a heart attack, like Tom's, or arthritic disease, stroke, cancer, Multiple Sclerosis, a car accident, an environmental hazard, or carpal tunnel syndrome or other job-related injury.

Are you covered under one or more of the five major, nationwide disability plans? If you are, or don't know, here's what you need to know to protect yourself:

Social Security Disability Insurance (SSDI) covers employees who have contributed sufficiently and long enough to the Social Security Trust Fund, typically 10 years. This requirement creates a hole for younger employees who haven't worked enough years and contributed sufficiently.

In addition to this requirement, individuals must meet Social Security's narrow definition of disability: "An adult is disabled if he or she is unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of at least 12 months, or can be expected to result in death." Clearly, Social Security doesn't pay for partial or temporary disabilities. If Tom qualifies, he must prove that he can never do any work that exists in the U.S. economy.

For some individuals, obtaining SSDI approval takes years, often requiring attorney assistance. SSDI's five-month waiting period for cash benefits and two-year waiting period for Medicare benefits places an additional financial burden on disabled employees.

Supplemental Security Income (SSI), a second plan Social Security provides, is available to all Americans with disabilities but only after they have exhausted their income and assets. Although SSI uses the same definition of disability as SSDI, payment into the Social Security Trust Fund is not required. In most states, SSI recipients automatically receive Medicaid insurance benefits.

Workers' compensation (WC), a plan that pays both cash and limited medical benefits, covers employees injured on the job. Although employers in most states must provide workers' comp insurance, not all employees are covered, such as contract workers, sole proprietors, and partners. Also, not all injuries are covered. For example, those sustained while commuting to and from work.

Employers are denying more claims because a single one can cause their premiums to increase, and workers' comp costs are already skyrocketing. This means many employees must fight for their right to collect benefits, often requiring attorney assistance. Most states require you to seek treatment from workers' comp-approved doctors and limit the type and number of treatments.

Employer-Sponsored Disability Insurance (ESDI) provides two types of coverage for injuries incurred on- and off-the-job: 1) short-term, for disabilities lasting less than six months; and/or 2) long-term, for disabilities lasting more than six months. ESDI pays cash benefits and does not provide medical insurance coverage.

Policies vary widely. The biggest hole in ESDI is that most employees have never seen a copy of the actual policy and don't know what coverage they have or don't have. Typically, employees base their buying decision on a short blurb provided during open enrollment.

Employers are not required to offer ESDI and employees do not have to participate. If you do have this coverage, however, ask your human resources manager for a copy of your policy and read it carefully.

Look for the definition of disability. Are you covered if you can't do your present job (called "own occupation") or any type of job (called "any occupation")? Will the definition change at some point? Some policies shift from "own occupation" to "any occupation" after two years.

What is the waiting period for benefits to start? What percentage of your income will you receive each month, and how is your pre-disability income calculated? Some policies exclude commissions and bonuses.

Read all clauses thoroughly. For example, are pre-existing conditions excluded? If so, how is a pre-existing condition defined?

The main drawback to ESDI is that disputes cannot be resolved in a state court and judge by a jury. This right is pre-empted by ERISA, an antiquated federal law that governs all employer-provided benefit plans. You must first appeal an adverse decision within the insurance company's internal appeal(s) process. Only after this remedy has been exhausted can you sue the insurer in a federal court.

The inherent problems of ESDI are two-fold:

  1. Resolving a dispute can take years and usually requires the help of an attorney at your expense.

  2. You cannot collect punitive or actual damages; your only award, if you win in federal court, will be the reinstatement of your original benefits (typically, federal court judges do not award attorney fees).

As a result, the insurer has nothing to lose by wrongly denying your claim or canceling your benefits.

Another gap is the "between jobs" hole. Unlike medical insurance, which may continue through COBRA when you leave a company, ESDI stops when you are terminated.

If you are depending on this insurance protection, beware! You may find that your policy won't pay you as much or as long as you think.

Private Disability Insurance (PDI) provides the most dependable protection. Like ESDI, it covers on- and off-the-job injuries and is a cash-only benefit plan; it doesn't provide medical insurance coverage.

Unlike ESDI, however, PDI disputes can be appealed in a state court and judged by a jury. In the past, juries have been sympathetic to disabled individuals who have been mistreated by big insurers, and they have awarded punitive and actual damages as well as attorney fees. Fear of jury reprisals is a powerful incentive for insurers to treat their policy-holders fairly.

Unfortunately, most employees don't have PDI, perhaps because they believe other plans will provide an adequate safety net. Now that you are armed with the facts, you may want to shop around for this coverage because once you are disabled or have been diagnosed or treated for certain diseases, you cannot purchase it.

Here's what to look for:

  • The best policy uses the "own occupation" definition of disability and is "non-cancelable and guaranteed renewable." Don't rely on the sales literature. Make sure these words are written in the policy!
  • Look for a policy with minimum clauses that give the insurer a way out of paying you benefits.

Take time to evaluate your situation. Raise awareness of the holes in disability coverage within your company. If you are a business owner or HR manager, talk to your insurer and employees. When your contract comes up for renewal, try to negotiate a better policy.

Your ability to earn a living is your greatest asset. Don't end up like Tom. Your earning power is worth insuring, especially given the high odds that disability will strike you without warning.

About the author:

Writers Jeanne Lazo, MBA, and Carol J. Amato, MA, are the authors of “Persistence is Power! A Real-World Guide for the Newly Disabled Employee.” For more information, visit www.disabilitybook.com.